Outsourcing slumps in the second quarter

John Ribeiro, IDG News Service |
July 21, 2011

TPI however reported growth in outsourcing in some markets like Asia-Pacific.

Outsourcing declined worldwide by 18 percent to US$16.4 billion in the second quarter because of weak demand in the Americas and an overall drop in the number of large contracts awarded, sourcing data and advisory firm TPI said on Wednesday.

Total contract value (TCV) in the Americas was down 51 percent in comparison to the same quarter last year, said John Keppel, partner, president for information services, and chief marketing officer at TPI.

The decline of large contracts with a TCV of about $500 million had its biggest impact on the Americas, Keppel said in a conference call.

Even as there was a big drop in the number of large contracts awarded, the total number of contracts awarded fell just 1 percent, TPI said.

But the Asia-Pacific market saw TCV grow by 55 percent over the same quarter last year, according to the Global TPI Index which measures commercial outsourcing contracts with a minimum value of $25 million. Europe, the Middle East and Africa (EMEA) saw a growth of 13 percent in TCV in the quarter.

Restructurings, which are defined as contracts that are renewed, restructured or renegotiated, had a growth in TCV of 30 percent over the same quarter a year ago.

Despite the global decline in outsourcing, Indian service providers like Tata Consultancy Services (TCS) and Infosys have reported strong revenue and profit growth for the second quarter, as they are seeing a surge in demand for their services.

TCS, India's largest outsourcer, said last week that its revenue for the quarter was $2.4 billion, up by 34.4 percent from the same quarter last year, according to international reporting standards. Infosys, the country's second largest outsourcer, reported that its revenue for the quarter was $1.7 billion, up by 23 percent from the same quarter last year.

Even as the overall market shrank in the second quarter, Indian service providers have been increasing their share of the market, said Siddharth Pai, partner and managing director of TPI India, in a phone interview on Thursday. A large number of the contracts that go to Indian providers are of a value lower than $25 million, which is a market that TPI does not cover, he added.

Indian service providers will however not go back to the high growth rates they used to report before the global recession, according to Pai. The market has not fully recovered, and it will be difficult for Indian service providers to continue growing at those rates from a larger revenue base, he added.

A stepping up of global outsourcing business is expected in the second half of the year, as current contract pipelines suggest an improvement in global TCV for the remainder of the year, Keppel said.

But there is no indication that the Americas will return to the "glory days" of outsourcing, TPI said. In contrast, growth in EMEA and Asia-Pacific will continue, though there could be some blips in China and Europe, it added.

This is likely to hit Indian providers who are still dependent on the Americas for about 60 percent of their revenue. Many of them are trying to expand their operations in Asia Pacific, particularly China, and in Europe.